WASHINGTON - The Treasury Department and Transactive Corp. squared off Tuesday in federal court over a rule that gives banks a monopoly of the electronic transfer of government benefits.

At the conclusion of the two-hour hearing, industry representatives appeared confident that banks would retain control of the lucrative market.

Thomas Greco, associate general counsel at the American Bankers Association, said he expects U.S. District Judge Emmet G. Sullivan to side with the Treasury Department and limit bidding on the business to banks.

"When the judge renders his decision, the government's position will prevail," Mr. Greco said.

But Transactive, a nonbank electronic benefits transfer provider in Dallas, and a civil rights group urged the judge to hand bankers and the government a defeat.

The Rainbow Coalition said nonbanks should be allowed to bid this fall when the Treasury Department solicits offers for the electronic transfer of government benefits in seven southern states.

The system would eliminate state and federal welfare checks. Instead, the government would deposit funds in accounts that recipients could draw down using an ATM-like card.

Rainbow Coalition attorney Dwain J. Kyles said the banking industry has historically redlined the communities where these benefits are needed most.

"They have not had a great history of doing business with small businesses, because banks are not in these communities," Mr. Kyles said.

Kathleen Beggs, an attorney for Transactive, attacked the requirement from a different front. The Treasury Department improperly relied on a law that prohibits nonbanks from serving as the government's financial agent, she said.

That law only applies if the department disburses money to banks, which then distribute it to individuals, she said. In this case, there is no middleman. The government is funneling the money directly to accounts established for welfare recipients, she said.

But Assistant U.S. Attorney Darya Geeter countered that banks do act as the government's agent because the institution - and not the welfare recipient - establishes the account. Besides, banks briefly hold the funds before disbursing them, she added.

The judge agreed, noting that the government will not be depositing the money in individuals' accounts.

The ABA's Mr. Greco dismissed the Rainbow Coalition's argument, saying he expects the judge to issue a narrow ruling.

"What the court needs to decide here aren't those public policy issues," he said. "That is best left to Congress."

The judge promised a decision on Sept. 7.

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